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Economics of Defense

Tim Kane’s book Bleeding Talent struck a nerve in the national security community upon its release in 2012. In it, Kane laid out a compelling case that the United States military was losing many of its best people due to inefficient personnel systems, morale issues, and stifling bureaucracy. If that book was the diagnosis, Kane’s newly released paper Total Volunteer Force provides his prescription. Kane’s paper is subtitled “A Blueprint for Pentagon Personnel Reform”, and it does serve that purpose should senior DoD figures wish to take on large scale personnel change. The paper is most notable for its attempts to introduce private sector forces to DoD, practices honed in a competitive setting making the best possible use of available labor.

The DoD labor market is influenced by both macroeconomic and microeconomic forces. Macroeconomically, unemployment in the general U.S. economy is an important force bearing on both DoD’s labor pool, and the resources available to hire, train, and retain talent (i.e. federal tax revenues). Microeconomically, service members will continue to seek the highest possible utility from their lives and careers. Kane’s paper provides twenty specific recommendations, and he does a commendable job factoring in both macro and micro forces. A few examples will help illustrate why Kane’s paper represents more than just a “common sense” approach to DoD personnel reform, and is largely grounded in solid economic theory, making it more likely to actually succeed.

One of Kane’s more novel recommendations is to allow veterans and reservists to apply for active duty jobs. As Kane says, “the current lack of permeability eliminates from military jobs millions of fully qualified citizens who have already served honorably.” Although his recommendation will have secondary effects in such areas as compensation and force structure, the central premise is logical. An efficient labor market is one in which talent can flow most freely and hiring agencies are best able to seek and retain the best qualified applicants. Kane’s recommendation achieves both goals, and has the additional macroeconomic benefit of driving down overall labor costs, as a reservist would only be paid at an active duty rate when their skill set is most needed in the active component. For example, in a ten year period in which the reservist is on active duty for three years and in reserve status for seven, a much better value would be generated for DoD versus paying an active duty salary for the full decade.

As might be expected, Total Volunteer Force recommends several compensation-specific measures. These include a shift from current “tenure” based pay toward a “role and responsibility” pay structure. Kane argues that “there is no reason to pay a senior O-3 in an easy job more than a junior O-3 in a demanding job.” It’s a convincing point, and aligns with labor principles such as incentivizing those positions upon which the success of the total organization rests. For DoD, this often means command. One critique of this recommendation is that it fails to take into account the prestige and promotion potential associated with those key positions, and thus risks over-incentivizing them.

Another compensation based recommendation is to expand pay flexibility. Kane suggests paying servicemembers more to serve in remote and unglamorous assignments. Potential compensation would increase the longer the position sits vacant, until a qualified applicant claims it. Although this logic holds in the private sector, such as the Alaska-based deep sea fishing job Kane references, DoD has the luxury of assigning personnel where they are needed, regardless of personal preference. Thus, although Kane’s recommendation makes some sense, it could also result in unnecessary expenditures to manipulate labor already within DoD’s purview to employ.

Kane also wishes to return a significant amount of control of servicemembers’ careers to the individual. One recommendation he makes in this area is the ability to opt out of the “up or out” system of promotion and retention. This would enable a greater degree of individual specialization in certain vocations such as pilots and tank crewmen, while drawing down labor costs by avoiding unneeded promotions and corresponding pay increases. This recommendation is one of the most viable Kane gives us, as it is within the services’ current authorities execute. Moreover, the economic logic seems sound. Why pay someone more money to fill a position they do not wish to fill when they are content at present with less money?

While this is indeed true, economists at MIT have written about the additional necessity of tying promotions to the difficulty of tasks being performed, and the worker’s efficiency at performing them. As they note, “the productivity gain of assigning a skilled worker to the difficult task is greater than the cost of the worker obtaining skills.” Thus, in the reverse, the pool of skilled servicemembers opting out of additional promotions will in turn lose the incentive to become more skilled, and the service will forego the corresponding productivity gains. For example, the Air Force may find itself for the first time in memory paying a large number of airmen to remain merely average. This sort of dramatic cultural change must be addressed should the services take on this particular recommendation.

Finally, Kane addresses one of the most pressing labor issues facing DoD in the 21st Century: the critical need for skilled cyber personnel. The scramble for cyber talent in a labor market dominated by tech firms able to pay exorbitant salaries has been covered in many venues, and Kane agrees with the common refrain that DoD must adopt a different set of rules for the cyber workforce. Specifically, he proposes an exemption from Defense Officer Personnel Management Act (DOPMA) standards, which prescribe fixed wage tables and promotion timelines. This recommendation is somewhat challenging to justify in an economic sense.

In economic theory, such a productivity proposition would be articulated using such terms as marginal revenue product, marginal physical product, and marginal cost of the worker. These concepts don’t map well to the DoD cyber workforce, however, since they are based on a capitalistic, for-profit model in which the cost of acquiring skilled workers is all about productivity and profits. That isn’t to say that Kane is necessarily off base, merely that DoD is an outlier due to its lack of a profit motive. Economic theory does support two other important aspects of Kane’s recommendation, the current skill premium associated with the cyber workforce, and the corresponding inelastic supply of highly skilled cyber personnel.

Overall, Tim Kane’s set of recommendations is both practical and well reasoned. As a recent interview with economists at West Point in this very blog pointed out, the military’s industrial age personnel system is ripe for an overhaul. Kane’s so-called “blueprint” is one of the most convincing and cohesive versions set forth thus far. Whether DoD has the appetite to take on such an ambitious project at this stage is anyone’s guess, but it would certainly do well to use Kane’s work as an architectural vision, if not its final blueprint.